Monday, January 05, 2009

No Stimulus for You!

Stimulus Nazi Paul Krugman is unhappy that Barak Obama might implement some of it through tax cuts
Is Obama relying too much on tax cuts?
I don’t know yet. But news reports this morning certainly raise questions.

Let’s lay out the basics here. Other things equal, public investment is a much better way to provide economic stimulus than tax cuts, for two reasons. First, if the government spends money, that money is spent, helping support demand, whereas tax cuts may be largely saved. So public investment offers more bang for the buck. Second, public investment leaves something of value behind when the stimulus is over.
No Paul. Individuals in the US are overindebted, and will not spend or borrow more until they have paid down their current debts. They may save some of their stimulus, but they will spend some too. If you want them to spend even more, stimulate even more. You can run a payroll tax holiday for as long as you need.

Also, the statist chauvinism of Paul's second assertion is remarkable. A bridge to nowhere is less valuable than an individual paying down their debt, or getting something they value, like healthcare, education, training, improving their house, etc. etc.

I also love the phrase "shovel ready". Shovels have certainly been busy lately.

The delay issues Krugman states, along with the inflexibility of fiscal policy to be ratcheted up and down, are fatal for his "bigger G" stimulus. By the time his Government spending is triggered, unemployment will already have increased the deficit to where it needs to be through lower PX, C, I, and T. Bigger G will overshoot, triggering inflation, so those who managed to hang on to their jobs will see their savings eroded.


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